Welcome to the year of the Dragon

By Carl Spiess, CFP, CIM, FMA, FCSI, MBA

With the books closed on the 2011 investment year, we are looking forward to helping clients improve investment returns for 2012. We are pleased to present our special "Contribution Season" issue of our newsletter to help you make the best financial planning and investment decisions. We will review how much you can contribute to RRSPs, TFSAs, RESPs and more, and then look at some of the global and local investment trends that cause us concern and those that give us reason for optimism.

"Contribution Season"

In the first week of January 2012, we already had clients sending in their RRSP, RESP, TFSA and even RDSP contributions. We want to make it easy for you to contribute:

You can set up a bill payment to "ScotiaMcLeod Investing" if you use another bank for online banking

Or use our handy Investment Order sheet
(download it) and mail a cheque.

Please contact us if you have questions about how best to make your contribution.

Here are reminders of the types of accounts and contribution limits. There are now so many plan types, it might be worth asking us to review which account it makes the most sense for you to focus on, based on your personal situation. For example, it makes relatively little sense to contribute to a TFSA if you still have significant mortgage debt and an accessible line of credit.

Registered Retirement Savings Plans ($22,450 for 2011 tax year note the Feb 29th deadline.
For 2012 the maximum is $22,970)

Tax Free Savings Account ($5,000 for 2012 – Dec 31st deadline. Note that if you've
never contributed, you now have $20,000 in TFSA room)

Registered Disability Savings Plans (recommended contributions varies based on family income but $1,000 per
year attracts at least 100% grants – Dec 31st deadline

Please note that on most accounts, unused room carries forward, so your total contribution room will include previous year's unused room. We would be pleased to help with calculations and recommended maximums, especially on the increasingly complex RESP and RDSP rules.

So where to invest?

First, let's review what happened in 2011. Fixed income fund investors fared the best, as falling interest rates pushed bonds to ever higher prices, ironically rewarding those relatively conservative investors the most. But those extremely conservative investors in money market funds saw less than 1% as their returns. After two good years in 2009 and 2010, the TSX and most Canadian equity funds wound up down 11%. US stock funds actually came in down less than 1%. Gold was looking like the biggest winner half way through the year, but saw huge volatility, giving back most of its growth to end up a respectable 10%. Other precious metals weren't so lucky, ending down 24%. International, Asian and emerging markets funds were largely down in the minus 10 to minus 20% range.

So, here are some of the things that give us concern moving into 2012. What worries us most as investors are low interest rates, high personal and government debt levels and the inability of foreign governments to curtail spending or raise taxes to fix their financial affairs. We saw this manifest itself in the Greek and Euro debt crisis, and the US government debt downgrade. Inflation is also now running higher than guaranteed bonds or dividend yields. Take a look at some historical data:

Today

2007

2002

1997

1992

CSB rate

0.5%

3.5%

1.3%

3.4%

6.0%

10 year Canada Bond Yield

2.0%

4.0%

6.0%

6.8%

8.0%

TSX Price / Earnings Ratio

14.6x

17.0x

20.2x

TSX dividend Yield

2.8%

2.0%

1.7%

Inflation

3.0%

2.1%

2.2%

1.7%

1.8%

This current scenario is quite a different situation from 5, 10, 15 or 20 years ago, when interest rates were very high, governments were getting spending under control and global trade was accelerating. We have significant concerns for individual investors who need to earn 5-8% off a conservative bond portfolio and such rates simply no longer exist. We have always recommended going longer term with bonds (check out the rates from this article we wrote in 1992 - Mutual Fund Reporter, Issue 70 - see the last page) but we must be approaching the point where interest rates cannot fall much more - and rising rates would hurt fixed income investors.

At least as individual investors, Guaranteed Investment Certificates (GICs) offer better rates (around 2.7%) on amounts up to $100,000 than the bonds that big pension plans would need to buy (yielding under 2%) to get a solid guarantee. We've even recently reviewed some high yield investments like 5 year corporate bond Exchange Traded Funds (ETFs) where the running yield for the next 5 years, assuming no defaults is 2.9%. Subtract a small .3% management fee and add a commission to buy and sell, and you are still way better off in a 5 year GIC at 2.7%.

What gives us reason for optimism as investors is how corporations are positioned. Companies are the building blocks of our stock markets and the most responsive constituents of our economy to making required changes to new fiscal realities. At present, the finances of our corporations are the healthiest they have been in a long time. Free cash flow ratios are at historic highs, meaning that companies are earning more much more than they need to cover the interest payments on their relatively low debt levels. The constituent companies in the S&P 500 in the US have had record combined earnings in 2011. Many Canadian and global companies have been steadily increasing their dividends reflecting their strong and stable growth.

Our advice for 2012

We are continuing to recommend balanced portfolios for our clients. Your "age as a percentage in guaranteed investments" is a good starting place. We can ladder bonds or Guaranteed Investment Certificates (GICs) to ensure that you have a steady stream of income over the next few years. Equity mutual funds, exchange traded funds or direct stock investments should be used to ensure exposure to the potential market returns of those companies that are in good financial shape. We are becoming very active looking for the investment vehicles and programs that minimize management fees and expenses, especially in this very low rate environment. Exposure to high yield bonds and global investments has helped in the past to round out a portfolio that can profit from future opportunities and protect against unforeseen risks. As always, diversification is a recommended strategy.

Canadian Investment Awards

Here is the link to the 2011 Canadian investment awards winner's list. Please note that virtually all investment managers and products that won awards can be purchased in your ScotiaMcLeod accounts. Simply contact us for details. We will admit to a bit of superstition in noting that often the winner of an award has a tough year immediately following, but do consider the process used to applaud good investment professionals is well worth following when making investment decisions.

Industry News: Blackrock to Acquire Claymore ETFs

Blackrock who run the major iShares brand of Exchange Traded Funds (ETFs) is buying the 2nd largest player and industry innovator Claymore. A decade ago consolidation started in the Mutual Fund industry and now it is happening in the newer Exchange Traded Fund industry. But while there were too many mutual fund companies back then, the opposite is true in the ETF space. With only 6 players in the market after the top two merge into one powerhouse with over 80% of the market, we do hope that innovation and good pricing of ETFs continues to be offered to Canadian investors.

When one is researching investment funds, there is already a huge amount of information available online. Morningstar, Globefund and each fund company have detailed information their sites. Our website has information on 2,500 funds and you can drill down to see important information like past performance, top holdings, fees and more. Regulators have now developed an additional new "Point of Sale" document requirement that can replace bulky and historically unread prospectuses. A new service is called Investor POS by InvestorPOS.com, provides access to some 25,000 such mutual fund related documents via its web site, with data provided by some 150 fund companies.

Next time you are researching a fund, try the site and let us know what you think:

® Registered trademark of The Bank of Nova Scotia, used under licence. ™ Trademark of The Bank of Nova Scotia, used under licence. Scotia Wealth Management™ consists of a range of financial services provided by The Bank of Nova Scotia (Scotiabank®); The Bank of Nova Scotia Trust Company (Scotiatrust®); Private Investment Counsel, a service of 1832 Asset Management L.P.; 1832 Asset Management U.S. Inc.; Scotia Wealth Insurance Services Inc.; and ScotiaMcLeod®, a division of Scotia Capital Inc. ("SCI"). Wealth advisory and brokerage services are provided by ScotiaMcLeod, a division of SCI. Insurance services are provided by Scotia Wealth Insurance Services Inc., the insurance subsidiary of SCI. When discussing life insurance products, ScotiaMcLeod advisors are acting as Life Underwriters (Financial Security Advisors in Québec) representing Scotia Wealth Insurance Services Inc. SCI is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.

The Spiess McGlade Team is a personal trade name of Carl Spiess and Allan McGlade.